EMERGING MARKETS: Access problems

It is an oddity that Southeast Asia – despite being home to 600 million people and having a total gross domestic product of over $2 trillion in 2011 – remains a relatively undeveloped private equity market, with very few funds that invest exclusively in the region.

The region’s economic prospects still look relatively bright: according to Bain & Co, its six largest economies are expected to grow at average annual rates of between 4.5 percent and 6.7 percent until 2015. There’s still a buzz around the region, as evidenced by Kohlberg Kravis Roberts and General Atlantic both setting up their first Southeast Asian offices in Singapore in 2012.

However, for any LP, getting exposure to the region remains a challenge. One Asian fund of funds manager says: “Southeast Asia is a place that you like; but you can’t find anyone you want without taking a big risk.”

Dealflow is often not strong enough to support country funds, he says – and focusing on countries is a dangerous strategy anyway, because “when everyone likes it, it gets overfunded very quickly, like Indonesia”.

Brahmal Vasudevan, CEO of Creador Capital, which invests in Indonesia, Malaysia and India, says that pan-Asian funds generally don’t do well in the region because they don’t necessarily have the relationships needed. Markets in Southeast Asia are “almost different planets of their own”, he insists, with different politics, cultures, languages, and banks. “So it is very hard to say: ‘I am a Southeast Asian investor’ … because you need to have a detailed understanding of how these markets operate, and this often requires a presence on the ground.”

Creador now has eight people in Malaysia and five in Indonesia, as well as its Indian base. But perhaps the only firm with a truly regional presence is Navis Capital Partners, which has several offices across the region.

Navis managing partner Nick Bloy tells PEI that Southeast Asia is so complex that it cannot be covered from a single hub. “Only a network of offices and local staff can really address Southeast Asia as a region. Such networks take time to build, and are expensive. Most firms are too young, don’t have enough revenues or are too lazy to build them,” he says.

However, Navis also operates outside Southeast Asia – by helping Indian and Australian businesses expand into the region, or vice-versa. “In general, we find the complexity of cross-border growth and M&A offers the potential for alpha if well-executed,” he says. For instance, much of the value the firm created during its investment in King’s Safetywear (a Singapore shoemaker from which it exited last year) came from the acquisition and integration of Australian peer Oliver’s.

“Reducing private equity investments to simple country buckets which have a yes or no on them is far too simplistic for a region that is become ever more integrated,” he argues.

According to a recent survey by Bain and the Singapore Venture Capital & Private Equity Association, although most market participants expected to see a big rise in new funds in Southeast Asia this year, the majority of those were likely to be single-country funds. There are clearly compelling practical reasons for that – but it won’t make it any easier for LPs to gain true regional exposure.